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UNCLAS SECTION 01 OF 04 PARIS 000987
SIPDIS
FROM USOECD PARIS
BRUSSELS FOR USEU
FRANKFURT FOR TREASURY ATTACHE
TREASURY FOR IA -- LESLIE HULL
STATE PLEASE PASS USTR FOR WAMA
E.O. 12958: N/A
TAGS: ETRDXGXTZMECONEFIN
SUBJECT: OECD TECHNICAL WORKSHOP ON TRADE AND
STRUCTURAL ADJUSTMENT
CONTAINS REPORT OF OECD MEETING -- NOT FOR INTERNET
DISTRIBUTION.
------------------------
SUMMARY AND INTRODUCTION
------------------------
¶1. On February 7, 2005, the Organization for
Economic Cooperation and Development (OECD) held a
technical workshop intended to seek advice from outside
experts on its draft report on trade and structural
adjustment. The paper is to be completed in time for
the OECD Ministerial Council Meeting May 3-4, 2005.
This report is intended to help Washington
policymakers, in particular the Council of Economic
Advisors and the Federal Reserve, frame their own
thinking in preparation for the Economic Policy
Committee meeting in April. End summary and
introduction.
-----------------------------
MAKING THE MOST OUT OF CHANGE
-----------------------------
¶2. On February 7, 2005, the Organization for
Economic Cooperation and Development (OECD) held a
technical workshop to discuss its draft study on trade
and structural adjustment. The paper is to be
completed by the time of the OECD Ministerial Council
Meeting May 3-4, 2005. The Secretariat aims to develop
a shorter booklet, approximately 20 pages, from key
elements of the study, currently 329 pages including
annexes in time for the Ministerial Council Meeting.
¶3. The study has been developed from a Swedish
proposal at the OECD Ministerial Council Meeting in
¶2003. It aims to identify the requirements for
successful trade-related structural adjustment via the
reallocation of resources (human, physical and capital)
to more efficient uses in response to the emergence of
new sources of competition, technological change or
shifting consumer preferences while limiting adjustment
costs for individuals, communities and society as a
whole.
¶4. With regard to best practices in the domestic
policy setting, the draft recommends the promotion of
macroeconomic stability, sound labor market policies, a
sound regulatory and competition environment and a
strong institutional and governance framework that will
favor structural reform. On the international side,
the OECD recommends the adoption of liberal trade
policies. The OECD also recommends fostering bilateral
and regional initiatives, noting that regulatory
cooperation can foster opportunities through trade or
ease adjustment strains in particular sectors as a
complement to wider multilateral commitments. Finally,
the paper recommends fostering multilateral cooperation
in trade and finance, in capacity building, and in
corporate responsibility and core labor standards.
---------------------------
TOO MUCH EMPHASIS ON LABOR?
---------------------------
¶5. Bernard Hoeckman of the World Bank noted that
there was a heavy emphasis in the draft on the labor
market, and wondered if more attention should not be
paid to facilitating entry and exit of firms. He said
that the role of access to credit was also under-
emphasized. With regard to trade, he pointed out that
developing countries had become heavy users of anti-
dumping remedies. This, and the rise of non-tariff
barriers, was masking the failure to liberalize -- it
is difficult to ensure that trade policy has changed in
reality, or whether the rules have simply shifted.
¶6. Mr. Hoeckman also expressed surprise at the
relatively favorable view in the report of export
subsidies, which he characterized as anathema to
economists. He mentioned in particular the treatment
of South Africa's Motor Industry Development Program
(MIDP). Note: By comparison, the December 2004 IMF
Article IV survey of South Africa said that "the
financial structure of the MIDP was complicated and
appeared to involve a combination of export subsidies
and heightened protection for domestic production. The
cost in terms of forgone fiscal revenue may be
considerable." End note. Hoeckman said that if the
OECD did want to retain its somewhat more favorable
view of export subsidies, it would require more
explanation.
---------------------
DENMARK AS ROLE MODEL
---------------------
¶7. Duncan Campbell of the International Labor
Organization (ILO) suggested that aid should be used to
help less developed countries to accept and adjust
under trade liberalization. He cited Denmark as an
appropriate model which combined efficient micro-level
flexibility with a good system of social security.
Denmark, he said, has generous unemployment benefits
but with a clearly defined end-point to make sure
people do not remain permanently unemployed. As a
result, polls show that the sense of employment
security is highest in Denmark, not because people are
sure that they will have the same job ten years from
now, but that they will have a job. With regard to
sequencing of reform, Mr. Campbell cited research
findings that trade liberalization which was preceded
by the establishment of core labor standards and
freedom of association are generally more successful.
¶8. Howard Rosen of the U.S. Trade Adjustment
Assistance Coalition said that the OECD draft missed
the point: structural adjustment is supposed to be a
means towards the end of achieving higher wages and
better standards of living, not shrinking industries.
He said that most countries were not putting enough
emphasis on prospective employment to absorb redundant
labor resources. In this regard, wage insurance
programs in the United States and Germany are a
positive model for the future which encourage people to
find new jobs, and employers to hire them. He
encouraged drafters to re-formulate the report so that
it could be used as a tool kit, or a reference guide,
which countries could use to adapt to their own
particular problems.
-----------------------
NOT ALL SUNNY IN SWEDEN
-----------------------
¶9. Karolina Ekholm of the Stockholm School of
Economics noted that the draft seemed to endorse a
Swedish labor reform model, but she insisted that not
everything in the Swedish model is good. On the
positive side, she said that in Sweden, free trade,
active labor market policies (ALMPs) and low open
unemployment in spite of generous unemployment benefits
significantly weakened protectionist pressures.
Summarizing recent literature on the Swedish labor
model, however, she said, that there was no clear
evidence of a positive effect of ALMPs on efficiency of
matching prospective job seekers with jobs. Subsidized
employment seems to have some crowding out effects,
while youth employment programs have strong crowding
out effects. ALMPs also appear to have the effect of
reducing geographical mobility.
¶10. Ms. Ekholm recommended that the drafters consider
that unemployment compensation levels fall with the
unemployment period and that ALMPs be used as a test of
willingness to work. Why has Sweden apparently done so
well in spite of the mixed result on labor market
reform? Ms. Ekholm said that Sweden's emphasis on
macro stability played an important role. She
concluded with the observation that a slightly
undervalued currency has been very helpful to Swedish
industry, which generated a comment from the field that
it was impossible for all countries in the world to
have an undervalued currency.
---------------------------------
GETTING IT RIGHT IN THE ANTIPODES
---------------------------------
¶11. Lisa Gropp of the Australian Productivity
Commission spelled out Australia's recipe for recent
structural adjustment success. She said the political
dimension had to be considered alongside the economic.
General equilibrium modeling created the "bullet
points" to inform the public of how much trade
protection was costing them. A broad constituency of
the export and import-competing sectors combined to
press for reform of the non-traded sectors, including
network industries, and of the labor market.
--------------------
SMALL STEPS IN JAPAN
--------------------
¶12. Risaburo Nezu of the Japanese Research Institute
of Economy, Trade and Industry showed data comparing
the ease of entry and exit of hardware and software
manufacturers in the United States with the relatively
static picture in his own country. This was a great
strength of the United States and a failing of Japan.
On a positive note, he said the number of mergers and
acquisitions have increased dramatically in Japan as a
result of government policies. The gradual shift away
from seniority-based salary increases and lifetime
employment guarantees towards performance-based
promotions and compensation was another positive
development in Japan. He suggested that the draft
focus more on adjustment in the high tech industry, but
instead of talking about how to handle "adjustment" we
should be looking for ways to enable "transformation".
----------------
NO DIRIGISTE, HE
----------------
¶13. Patrick Messerlin of Paris's Sciences Po (the
venue of Secretary Rice's February 8 speech) noted that
the pace of structural change is a political choice.
In the 1950s, he said, three million workers moved from
the agricultural sector to the manufacturing sector
with hardly a grumble. In the 1970s, by comparison,
moving 600,000 workers from one manufacturing sector to
another was practically impossible. On the proper
sequencing of reforms, Mr. Messerlin recommended that
goods and services markets be liberalized before labor
and capital markets. Like the ILO speaker, he favored
the Danish model, which had both rights and obligations
-- he said the draft report focused too much on rights
and not enough on obligations. With specific regard to
compensation for structural adjustment, he said yes to
compensating the small farmer, no to compensating the
big farmer: in France large, industrial farmers have
had 20 years to collect abnormal profits as a result of
trade protection -- "they don't deserve any additional
compensation".
¶14. Mr. Messerlin also recommended the abolishment of
anti-dumping and countervailing duty laws around the
world, saying these were just substitutes for
safeguards. He made a pitch for changing the report to
recommend that trade adjustment assistance be dropped,
and adjustment assistance be made general, because it
was often difficult to tell whether a worker lost his
or her job as the result of trade liberalization or
some other effect. Finally, echoing Ms. Kropp's
intervention, he called for developing a "culture of
evaluation" in Europe which would allow policymakers as
well as the public to examine the costs and benefits of
a particular action.
------------
THE WTO VIEW
------------
¶15. Like Mr. Messerlin, Robert Teh of the World Trade
Organization spoke at length on the abuse of anti-
dumping and countervailing duties as a substitute for
safeguards. He said that countries which use anti-
dumping laws to handle structural adjustment issues
undermine the credibility of the WTO. Mr. Teh also
said that the draft study takes too benign a view of
the role of preferential trade arrangements in managing
adjustment problems. He noted that with complex rules
of origin provisions, the level of protection often
actually increases under these arrangements. He
expressed ambivalence towards core labor standards.
Only to the extent that they underpin labor market
efficiency, he said, should core labor standards be
adopted.
SMOLIK